As we enter the closing days of a remarkable 2015, investors are undoubtedly dissecting the events of the past year to determine potential channels of profitability.
One possible candidate is the international financial sector, which has seen tremendous volatility in recent months. Several foreign banking stocks are off their 52-week highs by 20% or more, setting up what could be a lucrative contrarian opportunity.
Simply put, macroeconomic news — particularly concerns about Chinese growth in light of contractions in manufacturing output — have put more pressure on international banking stocks than many of their American counterparts. While finance overall hasn’t been too hot recently, the benchmark exchange-traded fund Financial Select Sector SPDR (XLF) — with a year-to-date loss of more than 1% — has significantly outperformed the iShares S&P Global Financials (IXG), which is down 4% YTD.
The allure of picking up major banking stocks at fire-sale prices is an understandable temptation. But before getting too trigger-happy, there could be serious reasons as to why the sector is so deflated.
Several well-known international banking stocks have been hit with a number of embarrassing scandals, hurting their brand image at a time when revenue and earnings growth are challenged.
The following three banking stocks have seen sharp losses this year, but may still continue to suffer near-term volatility.
International Banking Stocks to Avoid: Royal Bank of Scotland Group (RBS)
Times have been rough for international banking stocks, a sentiment few feel more powerfully than Royal Bank of Scotland Group (RBS).
Year-to-date, RBS stock is down more than 24%, sorely disappointing investors who had seen a 13% trough-to-peak lift for most of February. However, the financial results for the fourth quarter of fiscal year 2014 — RBS stock showed a loss of $5.4 billion in Q4 — dimmed optimism in light of the company’s efforts to shed large chunks of its international portfolio.
But because RBS stock is well off its highs from earlier in the year, and considering the future cost savings associated with dumping unprofitable assets, would now be an ideal time to roll the dice? The bullish argument was bolstered recently when RBS cleared the Bank of England’s stress test — barely. The embattled financial institution satisfied concerns just enough, primarily due to the sale of its equity stake in U.S. Citizens, valued at approximately $3 billion.
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A nagging factor contributing to the hesitation is that the stress test revealed vulnerabilities in RBS stemming from a potential protraction of economic weakness in China, as well as pressured commodity prices and euro zone challenges.
Many analysts have also noted the very real possibility that future stress tests will not be so lenient.
Given the fundamental uncertainties surrounding RBS stock, there may be some downside left.
International Banking Stocks to Avoid: Barclays PLC (BCS)
Although Barclays PLC (BCS) is the “least bad” among the banking stocks listed here, its -8.8% YTD performance belies the fact that it has been an extremely schizophrenic year for the London-based financial firm.
Things started off on a very promising note, with BCS stock catapulting more than 20% between January’s opener and the last day of July, on which the company announced job cuts in its investing banking sector as part of a broad consolidation strategy.
But from the month of August, sentiment quickly turned bearish as BCS stock dropped more than 22% in the markets. Negative publicity, including a class-action lawsuit stemming from accusations that Barclays manipulated interest rates to boost value for BCS stock, contributed to sharp declines. Settlements reached in other cases involving conspiracy in foreign exchange markets did little to offset the poor public image of BCS stock.
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The danger, then, is assuming that the bull case for BCS stock is built on anything other than the dumping of unfruitful assets.
While the sharp drop in BCS stock almost certainly triggered some form of contrarian sensibilities among investors, the multi-tiered challenges against Barclays raise far too many questions.
International Banking Stocks to Avoid: Credit Suisse Group (CS)
Zurich-based financial powerhouse Credit Suisse Group (CS) had one of the more interesting years thus far among international banking stocks, although it’s a memory they would probably rather forget.
Since plunging 16% in the opening month of 2015, CS stock racked up an impressive 40% in the markets by mid-summer. But as with rival Barclays, CS stock absorbed a major beating since August, driving down its YTD performance to -10%.
As with a large chunk of banking stocks, Credit Suisse has a perception problem.
Although the institution avoided the ignominy of a government bailout during the 2008 global economic crisis, U.S. regulators are pursuing claims of improprieties related to the mortgage-backed securities fiasco just prior to the crisis.
In addition, Credit Suisse was forced to address allegations of conspiracy in the markets through dark pools — a channel through which traders can engage in transactions without tipping off the broader investment community.
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While CS stock has made modest gains in recent days, it’s hardly enough to reverse the massive losses incurred over the past four months. Nominally, top-line sales growth is tepid, while revenue per share has been in sharp decline since 2010. Although attractively priced against trailing earnings, most investors would likely want to see further evidence of stability before jumping on board.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
